It is a sad day when a debt settlement company is charged with the same type of fraud perpetrated by the creditors with whom they are pledging to define agreements with. This is exactly what happened recently when the Consumer Financial Protection Bureau filed a civil suit against Mission Settlement Agency, a debt settlement company based in New York. While hardly surprising—debt settlement companies have earned an increasingly predatory reputation—this incident highlights how careful consumers need to be when considering enlisting help from a debt settlement company or credit counselor.
Use our credit card calculator to better understand your debt.
The sad truth is that the more desperate consumers are for help, the more likely they are to become victims of fraud. People do not seek out debt settlement companies unless they feel some level of desperation. It is this desperation which scam artists seek to exploit.
Remember, if a deal seems too good to be true, it probably is!
Debt Settlement or Credit Counseling – Is there a Difference?
Despite lofty promises of debt relief, even the most reputable companies do not eliminate your debt. They only consolidate it. Either they pay it off completely and then have you make your payments to them, or more commonly, you pay them and then they disburse those funds to your creditors. Sometimes the individual creditors don’t even know you are using such a service.
Though credit counselors hold a deservedly better reputation than debt settlement companies, the distinction is often murky. And it is important to realize that even using the best credit counselor for debt consolidation can damage your credit and prevent you from obtaining new credit, including a mortgage.
For most consumers, a debt settlement company or credit counselor is not the right answer. For one thing, there are always fees to use their services. The last thing anyone burdened by debt needs is to pay more fees. These fees may be hidden.
Debt settlement companies promise to consolidate a number of debts into one easy payment. But there is usually a fee built into the monthly payment, and sometimes they even hold the money to earn interest before making payment to the various creditors, resulting in further late fees for the consumer. In the case of Mission Settlement Agency, the indictment claimed that for more than 1,200 of their customers, the company allegedly took over $2 million in payments and fees without making a single payment to the customers’ creditors.
Some Better Alternatives
If you are struggling with debt, seek alternatives to debt settlement companies. Although they promise to negotiate with your creditors, usually they at best simply make the payment that you could just as easily make yourself. Try negotiating with your creditors yourself. See if they will put you on a payment plan to ease your monthly burden. Another resource is a credit repair company. There are many reputable resources for credit repair (such as Better Qualified in NY and NJ) that will coach you in how to get derogatory or erroneous debts off of your profile.
There are also community resources available to help people over-burdened by debt. Talk to your local housing authority, or your local consumer protection office.
If there are no other viable alternatives, do your homework before signing up with a debt settlement company or credit counselor. Visit the Better Business Bureau or the National Foundation for Credit Counseling for information on specific companies, their services, and their reputation.
Photo Credit: jepoirrier